RISK is a set of tools designed to identify profitable transactions based on the relationship between changing relative share prices and evidence of changing earnings growth in the corporate accounting data.

It is not a forecasting tool, but rather should be used in conjunction with forecasts as an assessment of the potential cost of the forecast being wrong.

The evidence that earnings growth is changing is not a forecaster. We are not able to say that because margins are high and falling that they will fall in the future, or that because sales growth is down that it will fall in the future. In order for an accurate forecast to produce a successful investment decision, it must be different than the forecast implied by the share price. If the share price is implying optimism about the company’s growth capability and the investor’s forecast is optimistic, then the potential investment gain from an accurate forecast is low, relative to the potential cost of an inaccurate one. It is important therefore to make investment decisions only in those forecasts that are different from that implied by the share price.

RISK is designed to find evidence of changing earnings growth-either rising after a period of decline or falling after a period of advance. In that way, the tools focus on a potential arbitrage between improving fundamentals and a depressed share price,(the basis for a RISK buy idea) or high share price and evidence of deteriorating fundamentals (the basis of a RISK sell idea.)

Our main practical ambition is to focus a portfolio manager’s attention on a changing fundamentals trend with enough time to bring research resources to bear on the potential investment opportunity implied by an acceleration or potential threat of a deceleration.

Our most important performance criteria are the frequency of successful transactions and the cost of unsuccessful transactions. With any transaction tool (or transaction-oriented asset manager) the relevant question is, Can we out-perform a buy/hold strategy by asset? The success of a transaction-oriented tool over a buy/ hold strategy is a function of the success of the sell decision.

The attached document is a review of our long-term performance record in the total stocks universe, in the major indexes, and by economic sector. Past performance is not a predictor of future results and actual portfolio performance is a function of portfolio construction as well as transaction success. Click here to download Performance.PDF

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